Markets
Core bonds hold a minor positive bias today with US Treasuries outperforming German Bunds despite tonight’s 10-yr Note auction. Risk aversion helps the safe haven bid. The German yield curve flattens with yield changes ranging between +0.8 bps (2-yr) and -3.1 bps (30-yr). Peripheral yield spreads vs Germany widen by 4 bps to 7 bps. Supply was at play with both Greece (€3bn) and Ireland (€6bn) successfully launching new 10yr syndicated benchmark deals. Additionally, Austria officially joined Finland in criticizing the size and the structure of the EC’s recovery fund proposal (see below). The US yield curve bull flattens with yields edging 1.2 bps (2-yr) to 6.8 bps (30-yr) lower. Investors are well aware that betting against a dovish Fed wasn’t really fruitful over the past years. The Fed’s ultra-easy monetary policy stance and willingness to add stimulus if necessary could thus help explain investor’s preference for UST’s. Fed Chair Powell categorically ruled out introducing negative policy rates in a next move, but the Fed supposedly is studying the Australian RBA’s model of targeting the 3-yr yield at the same level of the policy rate (0.25% in Australia). We argued before that the Fed’s unlimited, open-ended QE programme is the de facto start of yield curve control. By targeting specific levels, the Fed would strengthen its promise of keeping policy rates near the lower bound for quite some time to come. An additional advantage could be that – as the Australian experience learns – credibility reduces the amount of firepower necessary to achieve that yield goal. It’s unclear whether the US central bank is also exploring the Japanese option of also targeting the longer end of the curve. A decision on the issue isn’t expected tomorrow, but could come as soon as September. In a next phase, the Fed could be looking at setting numerical targets for its dual goals of full employment and price stability to guide an exit phase. Apart from hints about yield curve control, investors will be eying the Fed’s updated growth/inflation forecasts and dot plot. Back in March, the Fed exceptionally didn’t provide an update given huge volatility and uncertainty at the height of the COVID-19 crisis. A grim outlook, benign inflation, slow recovery and stable policy rates over the policy horizon can be expected.
On FX markets, the (trade-weighted) dollar initially tried to extend a fragile bottoming out process, but the move ran into (minor) resistance around 97, the intraday tops of last Friday and yesterday. EUR/USD made a parallel change lower to 1.1250, before returning to the 1.13 big figure and beyond as US investors joined. USD/JPY changes hands below 108 after yesterday’s leap south. Risk sentiment on European stock markets turned negative. Dreadful German April trade data (exports down 24% M/M) and downward growth revisions by several national banks served as a cue for some profit taking. Main indices lose 1.5% to 2%. Sterling was in the defensive in today’s risk-off climate with EUR/GBP moving away from short term technical support around 0.8863 and currently trading near 0.8925.
News Headlines
Austrian Finance Minister Bluemel repeated the country’s objections to EU’s € 750bn recovery plan as proposed by the European Commission end last month. Austria both doesn’t agree with the size and the content of the plan. The country disagrees with the balance between grants and loans. It wants tighter conditions for the loans and also asks concrete details on how the debt will be repaid. The country wants the package only to consist of one-time, targeted emergency aid with no fundamental change of the funding of the EU budget.
The Bank of France said that it will take two years for economic output to recover from the corona crisis impact. The damage on the labour market will be even more long-lasting. Even with solid growth in the next two years, unemployment is expected to continue to rise to 12% in the first half of 2021 and will still be at 9.7% at the end of 2022. Separately, France this morning published an aid package worth €15 bn to support the aerospace industry to prevent job losses (100 000 jobs are threatened according to French FM) and support aircraft orders.
